• pursuant to Listing Rule 5635(b) because the Proposed Transaction would result in a change of control of the Company due to the fact that the Investor will own greater than 20% of the common stock and voting power outstanding upon completion of the Proposed Transaction; and
• pursuant to Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price that may be less than the greater of book or market value.

This is in response to your correspondence requesting an exception under Listing Rule 5635(f) to Nasdaq’s otherwise applicable shareholder approval requirements with respect to a proposed issuance of securities (the “Proposed Transaction”).

You represented that the Company, a biopharmaceutical company, has experienced delays in government funding for its lead product candidate, and has been unsuccessful in securing alternative funding to continue operations. Additionally, in its most recent Annual Report on Form 10-K, the Company’s independent auditor includes the qualification that there is substantial doubt concerning the Company’s ability to continue as a going concern. You stated that, without the Proposed Transaction, the Company is in imminent danger of being unable to meet its monthly payroll, lease payments and other obligations and has only enough cash to fund operations for a month, at which time it will be forced to initiate steps to cease operations, in addition to laying-off or furloughing many of its scientific employees.

In the Proposed Transaction, you stated that the Company will issue shares of common stock to one investor equal to greater than 20% of the existing total shares outstanding at a price per share expected to be greater than current market and book value. However, due to fluctuation in the Company’s stock price, the ultimate price per share of the common stock may potentially be at a discount to market value. Additionally, following the closing of the Proposed Transaction, the sole investor will obtain greater than 50% voting power and beneficial ownership in the company.

You stated that the Company has pursued multiple alternative sources of financing for more than one year, completing smaller financings that raised limited funds but failing to complete several larger transactions, including the sale of common stock in a public offering that reached late stage negotiations, but was ultimately unsuccessful. Despite these efforts, you represented that there are currently no realistic alternatives to the Proposed Transaction and that the proposed investor is unwilling to structure the Proposed Transaction in a manner consistent with the shareholder approval rules. As a result, there is not enough time to obtain shareholder approval prior to the issuance of the shares of common stock in the Proposed Transaction before the Company runs out of cash. You further indicated that if the Proposed Transaction is not completed in the very near term, the Company will be forced to cease operations, including all product development efforts, and terminate or furlough scientific employees, and that the result of these actions may negatively affect the Company’s ability to obtain government funding. Additionally, you stated that given the potential negative effects on the Company’s operations, the Company sought advice from bankruptcy counsel. Finally, you stated that the Company expects that the Proposed Transaction would enable the Company to meet the requirements for continued listing on Nasdaq for at least the next year.

Without the requested exception, shareholder approval would be required:

• pursuant to Listing Rule 5635(b) because the Proposed Transaction would result in a change of control of the Company due to the fact that the sole investor will own greater than 50% of the common stock and voting power outstanding upon completion of the Proposed Transaction; and
• pursuant to Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price that may be less than the greater of book or market value.

Based on our review of the circumstances described in your correspondence and your representations regarding: (i) the Company’s financial condition, (ii) the dire consequences to the Company should it not obtain the financing provided by the Proposed Transaction, and (iii) the Company’s expectation that it will remain in compliance with all applicable continued listing requirements, we have determined to grant the requested exception to the shareholder approval rules. In order to rely upon this exception, the Company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction (including the number of shares of common stock that could be issued and the consideration received) and alerting shareholders to the omission to seek the otherwise required approval. The letter must indicate that the Company is relying on a financial viability exception to the shareholder approval rules and that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on this exception. The Company must also make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required in the letter as promptly as possible but not later than ten days before the issuance of the securities.

The Company, a bank holding company, conducts banking operations through its wholly owned subsidiary (the “Bank”). You stated that the Company has suffered significant operating losses for the fiscal years 2009, 2010 and 2011, and expects to report a loss for the fiscal year ended December 31, 2012. In its most recent annual report on Form 10-K, the Company’s independent auditor includes the qualification that there is substantial doubt concerning the Company’s ability to continue as a going concern.

While the Bank had been considered “adequately capitalized” by bank regulators prior to October 30, 2012, based on its September 30, 2012 Report of Condition and Income, the Bank was deemed “undercapitalized.” Furthermore, based on preliminary year end results for 2012, the Company expects the Bank’s Tier 1 leverage ratio to continue to decrease, and the Bank is expected to be classified as “significantly undercapitalized” based on its December 31, 2012 financial information. The Company’s losses are expected to continue in the first quarter of 2013, which could result in the Bank being deemed “critically undercapitalized” as of March 31, 2013, thus triggering the process to appoint a receiver or conservator of the Bank. As the Bank is the only material asset of the Company, the receivership of the Bank would cause the loss of any remaining value to the Company’s shareholders.

In the Proposed Transaction, the Company would issue common stock in connection with an exchange of currently outstanding preferred stock and a private placement. The preferred stock was issued to the United States Treasury Department (the “Treasury Department”) under the Troubled Asset Relief Program. The Treasury Department has agreed to exchange the preferred stock for common stock in an amount equal to a substantial discount to the principal amount plus accrued and unpaid dividends (the “Exchange”). Following the Exchange, the Company would conduct a private placement of common stock issuing shares to outside investors (the “Investors”) at the same price as the Exchange (the “Private Placement”). The Treasury Department will enter into separate agreements to sell the shares of common stock it receives in the Exchange to the Investors. In addition, as a condition imposed by the Investors, officers and directors of the Company (the “Insiders”) will purchase shares in the Private Placement on the same terms as the Investors. The common stock issued in the Exchange and in the Private Placement will be priced at a significant discount to the current market value. Finally, as promptly as practicable following the closing of the Private Placement, the Company will conduct a rights offering for shareholders, including the Insiders, that owned shares prior to the Exchange and Private Placement, which would allow these shareholders to purchase shares of common stock at the same price as the Exchange. It is anticipated that the Insiders’ total investment would be no more than 3% of the Proposed Transaction.

Given the Bank’s critical capital levels and regulatory pressures, the Company requires a substantial investment in order to return the Bank to a “well-capitalized” regulatory position. As a result, the proposed issuance of common stock is significantly greater than 20% of the pre-transaction total shares outstanding. You stated that the Company has pursued multiple alternative financing strategies for over one year, and that there are no realistic alternatives to the Proposed Transaction. The Company did not anticipate that obtaining shareholder approval would be a significant hurdle, but delays caused by ongoing negotiations about the Proposed Transaction, a hostile takeover that did not proceed, and delays in receiving regulatory approval, as well as the Company’s continuing losses, have all contributed to a situation in which the time needed to obtain shareholder approval would seriously jeopardize the financial viability of the Company. In addition, the Investors’ willingness to participate in the Proposed Transaction is conditioned on the transaction being sufficient to return the Bank to a “well-capitalized” position, necessitating an issuance of stock in excess of 20% of the outstanding shares. You stated that if the Proposed Transaction is not completed in the very near term, the Company will be forced to file for bankruptcy protection or bank regulatory authorities may appoint a receiver or conservator for the Bank, which you indicated would result in a complete loss for the existing shareholders.

The Company expects that the Proposed Transaction would return the Bank to the regulatory category of “well-capitalized” and prevent it from falling into receivership. In addition, the Company believes that following the closing of the Proposed Transaction, it would meet the requirements for continued listing on NASDAQ.

Without the requested exception, shareholder approval would be required pursuant to Listing Rule 5635(c) because the issuance of discounted common stock to the officer and directors would be considered equity compensation and Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value.

Based on our review of the circumstances described in your correspondence and on your representations regarding the Company’s financial condition, we have determined to grant the requested exception to the shareholder approval rules. This determination is based upon your representations that the Company needs to quickly proceed with the Proposed Transaction to avoid bankruptcy and the appointment of a conservator or a receiver for the Bank. In order to rely upon this exception, the Company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction (including the number of shares of common stock that could be issued and the consideration received) and alerting shareholders to the omission to seek their otherwise required approval. The letter must indicate that the Company is relying on a financial viability exception to the shareholder approval rules and that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on this exception. The Company must also make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required in the letter as promptly as possible but not later than ten days before the issuance of the securities.

As an additional matter, this exception applies only to the Proposed Transaction and not to any other issuances of securities which you stated may occur following the completion of the Proposed Transaction.

The Company, a savings and loan holding company, conducts banking operations through its operating subsidiary (the “Bank”) and does not have any significant business or assets apart from its ownership of the Bank. You stated that for the past several years, the Bank has experienced very substantial increases in loan delinquencies and defaults due primarily to unfavorable economic conditions including the downturn in the real estate market in its service area. As a result, the Company has reported substantial losses for each of the past two years and does not have sufficient cash to meet its operating expenses. In its report in the most recent Form 10-K, the Company’s independent auditor included the qualification that there is substantial doubt concerning the Company’s ability to continue as a going concern.

The banking regulators determined that the Company and the Bank are in “troubled condition” which is a regulatory designation resulting in substantial restrictions on the operations of both the Company and the Bank enforced through Cease and Desist Orders (the “Orders”). Pursuant to the Orders, the Company is required to maintain capital ratios higher than otherwise required and is not permitted to incur, make payments on, or increase any debt without the approval of its regulators. As a result, the Company is in default on a substantial amount of its outstanding debt, including a credit facility which is secured by the assets of the Company (the “Debt”). To preserve capital, the Company has closed two of the five branch offices of the Bank and has sold its headquarters building. In addition, the Company has sold other assets, including non-performing loans.

In the Proposed Transactions, the company would issue common stock, or securities which would be convertible into common stock (the “Convertible Securities”), in exchange for currently outstanding preferred stock and a portion of the Debt. The Convertible Securities would vote on an as-converted basis. The exchange for the preferred stock would be at a 50% discount to the liquidation preference and would also be in satisfaction of accrued but unpaid dividends. The U.S. Treasury Department would also exchange preferred stock it was issued under the Troubled Asset Relief Program and, as a result, would become the largest holder of the Company’s common stock. Concurrently with the completion of these exchanges, the Company would sell shares of common stock in a private placement to unrelated investors at a discount to the market value. You stated that the completion of each part of the Proposed Transactions is conditioned on the completion of each of the other parts. The Company plans to seek the necessary approval of the banking regulators to allow it to retain at the holding company level a substantial portion of the proceeds from the private placement and to invest the remainder in the Bank.

You stated the Company exhaustively explored possibilities to structure a transaction which would comply with the shareholder approval requirements but was unable to do so. Each participant in the Proposed Transactions demanded the contingency that all portions close concurrently. The investors in the private placement agreed to invest only if the improvements in the Company’s capital structure, which would result from the preferred stock exchanges, were certain to occur. The participants in the Proposed Transactions also insisted on full voting power and were unwilling to accept a non-voting security which would be convertible into common stock only after shareholder approval.

The Company’s financial advisory firm approached approximately 175 potential investors over the past 2 years but could not reach an agreement for another source of capital on different terms. Efforts to sell the Company in its entirety were not successful. You stated that based on these efforts, the Company believes that the Proposed Transactions are the only available alternative. In addition, you stated that if it is not able to complete the Proposed Transactions in the very near term, the Company will be forced to file for bankruptcy protection or bank regulatory authorities may appoint a receiver or conservator for the Bank.

The Company expects that as a result of the Proposed Transactions, it would avoid having to seek bankruptcy protection, and the Bank would no longer face the risk of the appointment of a receiver or conservator. In addition, the Company believes that following the closing of the Proposed Transactions it would meet the requirements for continued listing on NASDAQ with the possible exception of the bid price requirement. In that regard, the Company plans to complete a reverse stock split, if necessary, at a ratio sufficient to comply with that requirement. Without the requested exception, shareholder approval would be required pursuant to Listing Rule 5635(b) as the issuance could result in a change of control and pursuant to Listing Rule 5635(d) as the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value. Additionally, without the requested exception, the Proposed Transactions would not comply with the Voting Rights Rule because the Convertible Securities would effectively have greater voting rights than the common stock since they would vote on an as-converted basis and would convert at a discount to the market value. You stated that the time that would be required to prepare for and conduct a meeting of stockholders would seriously jeopardize the Company’s continuing existence as an operating entity and that even more urgently, the Company does not have the cash that would be required to hold such a meeting.

Based on our review of the circumstances described in your correspondence and on your representations regarding the Company’s financial condition, we have determined to grant the requested exception to the shareholder approval rules. This determination is based upon your representations that the Company needs to quickly proceed with the Proposed Transaction to avoid bankruptcy and the appointment of a conservator or a receiver for the Bank. In addition, we have determined to grant an exception from the Voting Rights Rule as it applies to the Proposed Transactions because both that rule and former Securities and Exchange Commission Rule 19c-4 permit such an exception where necessary to rescue a company in financial distress. In order to rely upon this exception, the Company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transactions and alerting shareholders to the omission to seek their otherwise required approval. The letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on this exception. The Company must also make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required in the letter as promptly as possible but not later than ten days before the issuance of the securities.

This exception applies only to the Proposed Transactions and not to any other issuances of securities which you stated may occur following the completion of the Proposed Transactions.

This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) with respect to a proposed issuance of securities (the “Proposed Transaction”). In addition, you asked about the applicability of the voting rights requirements of Listing Rule 5640 and IM-5640 to the Proposed Transaction.

The Company is in the pharmaceutical industry and has invested substantially all of its efforts and financial resources into the development of a single new pharmaceutical product (the “Product”), which has not yet been approved by the Food and Drug Admiration (the “FDA”). The company expects that the FDA will complete the current stage of its review within approximately three months. The Company has not yet generated any product revenues and has funded its operations through credit facilities and the issuance of debt and equity securities. 

You stated that the Company has a working capital deficit of several million dollars and that without additional capital it is in imminent danger of being unable to meet its monthly debt service, office lease, payroll and other obligations. As part of its plan to reduce expenses, the Company has already reduced its workforce by approximately 50% and has temporarily amended its credit agreement to achieve additional liquidity. You also stated that due to the extent of the Company's payment delinquencies, certain vendors performing activities critical to the FDA’s review of the Product have informed the Company that they will cease performing services until past due payments are received. In addition, the Company faces the imminent risk of default under its secured credit facility, which could result in immediate insolvency. As such, you have stated that unless the Company can quickly complete the Proposed Transaction, it would likely have to cease operations or file for bankruptcy protection. 

You stated that over the past ten months the Company, together with its financial advisors, has unsuccessfully sought other financing sources and had discussions with over 50 prospective investors. The Company believes that its only viable alternative is the Proposed Transaction. In the Proposed Transaction, the Company would sell shares of voting preferred stock, convertible into shares of common stock, and warrants, exercisable for additional shares of common stock, to several purchasers including two current shareholders. Both the conversion price of the preferred stock and the exercise price of the warrants would be at discount to the market value of the common stock. The number of shares of common stock potentially issuable would equal approximately 65% of the Company’s outstanding shares on a post-transaction basis. The voting power of the preferred stock would be limited to that number of votes equal to the number of shares of common stock into which the preferred stock would be convertible if it were converted at market value on the date of the definitive purchase agreement. The purchasers would be entitled to appoint directors proportional with their ownership position. The number of directors they could appoint would decline proportionally with a decline in their ownership position in the Company. 

The Company expects that the Proposed Transaction would be sufficient to fund its operations for the next 12 months and that the Company would satisfy NASDAQ’s continued listing requirements throughout that time. In addition, the Company would be able support the FDA approval process for the Product. 

Without the requested exception, the Proposed Transaction would require shareholder approval pursuant to Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value. You stated that a delay in securing shareholder approval would seriously jeopardize the financial viability of the Company, that the purchasers in the Proposed Transaction are unwilling to structure the financing in a manner that would not require shareholder approval, and that the Company does not have sufficient cash to sustain it through a shareholders’ meeting. 

Based on our review of the circumstances described in your correspondence and on your representations regarding the Company’s financial condition, we have determined to grant the requested exception to the shareholder approval rules. This determination is based on your representations that the Company needs to quickly proceed with the Proposed Transaction to avoid bankruptcy. The exception is subject to the following: (i) the Company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on the exception; and (iii) the Company must make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required in the letter as promptly as possible, but no later than ten days before the issuance of the securities. We note that the Proposed Transaction would comply with Listing Rule 5640 and IM-5640 and therefore does not require an exception from these requirements.

This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) with respect to a proposed issuance of securities (the “Proposed Transaction”).  In addition, you asked for a related exception from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”). 

In the Proposed Transaction, the Company would sell to the Investor shares of preferred stock, which would be convertible into common stock at a price below the current market value.  The Preferred Stock would vote on an as-converted basis resulting in the Investor owning approximately 73% of the Company’s outstanding shares of voting stock on a post-issuance basis.  The Investor would have the right to appoint 4 members of the board of directors which would consist of no more than 7 members.  The number of directors the Investor could appoint would decline proportionally with a decline in the Investor’s ownership position in the Company.  The Investor is not currently affiliated with the Company.  

You stated that, due to a variety of circumstances, the Company is in dire financial condition.  While the Company has experienced continuous net losses for approximately fifteen years, it has been able to continue operations through issuances of common and preferred stock and debt.  Recently, the Company lost a significant customer, which last year accounted for approximately 42% of its total revenue.  Subsequent negotiations with several prospective large customers ended without any sales agreements being reached.

You explained that as its condition has continued to deteriorate, the Company has released most of its employees and has delayed or withheld payments to vendors, resulting in its inability to obtain the products and services necessary to operate its business.   The Company has debt maturing in approximately 10 months, which under the current circumstances it would be unable to repay.  In addition, approximately five months ago, a patent infringement lawsuit was filed against the Company, significantly hindering its capital raising efforts due to the inherent uncertainty regarding any possible settlement.

The Company’s investment bankers have explored strategic alternatives, including a possible sale and potential sources of capital, and in the process have contacted over forty parties.  You stated that until the Proposed Transaction, however, there has not been any viable interest.   The Company’s bankruptcy counsel has begun preparing a bankruptcy petition in the event the Company is unable to quickly raise the needed funds.

The Company believes that if it completes the Proposed Transaction it would be able to continue operations for at least twelve months, during which time it would refocus its marketing efforts to compensate for the recent loss of the significant customer and have the opportunity to grow its sales and improve its prospects.  The Company would also use the proceeds of the Proposed Transaction to settle its debt for a significantly reduced cash amount and shares of common stock.  In addition, the Company agreed to a term sheet for the settlement of the patent infringement lawsuit, which would be funded from the proceeds of the Proposed Transaction.   The Company believes that following the Proposed Transaction, it would meet the requirements for continued listing on NASDAQ with the possible exception of the bid-price requirement for which it is currently within the 180-day compliance period (the “Compliance Period”).   You stated that the Company would take all steps necessary, including a reverse stock split, to regain compliance with the bid-price requirement by the expiration date of the Compliance Period.  In addition, the Company did not timely file its Form 10-Q for its most recently completed quarter.   The Company has stated that it expects to file that Form 10-Q within approximately three weeks.  In the meantime, the Company issued a press release containing detailed financial information for the quarter. 

Without the requested exception, the Proposed Transaction would require shareholder approval pursuant to: (i) Listing Rule 5635(b) because the issuance could result in a change of control; and (ii) Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value.  Additionally, without the requested exception, the Proposed Transaction would not comply with the Voting Rights Rule because the preferred stock would vote on an as-converted basis and would convert at a discount to the market value of the common stock, thereby effectively affording it greater voting rights than the common stock.  In addition, depending on the number of directors on the Company’s board, the Investor’s percentage representation on the board could be greater than its percentage ownership in the Company.

You stated that a delay in securing shareholder approval would seriously jeopardize the financial viability of the Company, and the Proposed Transaction is the only available means to avoid an imminent bankruptcy filing.  You added that the Company’s current cash position is not sufficient to sustain it through the time that it would take to obtain shareholder approval.

Based on our review of the circumstances described in your correspondence and on your representations regarding the Company’s financial condition, we have determined to grant the requested exception to the shareholder approval rules.   This determination is based on your representations that the Company needs to quickly proceed with the Proposed Transaction to avoid bankruptcy.  In addition, we have determined to grant an exception from the Voting Rights Rule as it applies to the voting power of the preferred stock because both that rule and former Securities and Exchange Commission Rule 19c-4 permit such an exception where necessary to rescue a company in financial distress.  The exception is subject to the following:  (i) the Company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on the exception; and (iii) the Company must make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.  

As an additional matter, you indicated that the Company is considering an investment in a company which is in a related business.  The exception granted herein does not apply to such investment, which would be fully subject to the shareholder approval requirements.  In that regard, you stated that the Company would not use any of the proceeds from the Proposed Transaction to fund the investment without the prior approval of its shareholders other than the Investor.